Marchex, Inc. (MCHX) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Jason, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Marchex Second Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Mr. Trevor Caldwell, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you. Good afternoon, everyone, and welcome to Marchex' Business Update and Second Quarter 2019 Conference Call. Joining us today are Michael Arends and Russell Horowitz. Before we start, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, including references to our financial and operating performance and actual results may differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause these results to differ materially are set forth in today's earnings press release and in our most recent annual and quarterly reports filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we take no obligation to update these statements for subsequent events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release is available on the Investor Relations section of our website. And at this time, I'd like to turn the call over to our Chief Financial Officer, Mike Arends.

Thank you, Trevor. Good afternoon, and thank you, everyone, for joining us today. Our recent progress highlights how our business is evolving and driving our current momentum. Solving mission-critical problems for our customers is the focus of everything we're doing as a company and is at the heart of our innovation and investment initiatives. We are leveraging our unique asset of more than 1 billion minutes of conversational data to expand our suite of products and solutions. This suite is a reflection of the expanding market opportunity we're seeing for Marchex and is an important initial step in laying the foundation for long-term growth. We are finding that more and more businesses want to adopt solutions that optimize their sales opportunities and deliver personalized customer experiences, and Marchex is increasingly the provider they're turning to. Powering our new suite of solutions is Marchex Stream, our new conversational data streaming and business intelligence platform that we announced last quarter. Marchex Stream gives us speed and scale. It also gives us the ability to surface insights during consumer to business conversations, and most importantly, get those insights into the hands of businesses quickly, so they can take action when it matters most. We know that each moment in a conversation can make or break a customer outcome, whether that be an appointment, a sale, a test drive or a price quote. Our technology is designed to provide businesses with data-driven insights on how to create valuable personalized experiences to meet their customers' needs and keep them coming back. It also provides the tools to take action on these insights to win more sales. Predicting intent and anticipating customer need is necessary for businesses to drive growth into these fast evolving digital and increasingly mobile world. But customer journeys are fragmented and complex. The traditional path to purchase funnel now resembles a winding maze of customer touch points across many different communication channels. Yet inside that maze resides customer signals rich with intent that can help businesses cut through the noise to create great customer experiences. One of Marchex' most important advancements has been a recently released conversational AI, a new suite of AI models featuring 230 signals that can understand and predict customer intent. This technology is the catalyst to helping businesses deliver personalized experiences during sales conversations and it improves outcomes both over the phone and via text. Our recent innovations have dramatically enhanced our ability to process and extract signals from conversations as they occur in real time. We've gone from delivering consumer the business transcripts in several hours after a call to delivering the full transcript in seconds, while producing predictive consumer intent signals virtually instantaneously. And that's not all, Marchex conversational AI is the insight engine that powers our newly released Marchex Sales Edge, a new suite of sales acceleration solutions we announced just yesterday. Sales Edge lets business analyze customer conversations, optimize their conversational approach and take action to improve sales outcomes all from our AI-driven insights and tools. This software suite includes Sales Edge Local, Sales Edge Enterprise and Sales Edge Rescue. Sales Edge Local is an app for business location managers. It analyzes phone conversations, provides performance insights and prioritizes leads using intelligent lead scoring. It enables regional and in-store sales managers to optimize the critical conversations and a tool set to train frontline customer engagement sales people. Sales Edge Enterprise is an app for corporate managers that provides conversational performance insights and trends across a distributed sales organization, with capabilities to track the performance of hundreds or thousands of store or franchise locations. And finally, Sales Edge Rescue is a transformational product that alerts businesses when potential buyers finish the conversation without making a purchase. In Sales Rescue, our AI interprets a host of signals, such as when a customer didn't make an appointment or when the inventory didn't match the customer's initial question and delivers this intelligence to businesses, so they can take real-time action to rescue the sale before it migrates to a competitor. Sales Rescue was the first of the sales acceleration suite to release in April, and we're already in trials with a handful of customers that can potentially be additive to our growth profile as we move into next year. It's clear from the early feedback that the value proposition is both sticky and meaningful. Sales Rescue gives Marchex an opportunity to expand from providing robust data analysis to creating action-based data insights and tools-based solutions. Predicting and understanding consumer intent drastically changes the playing field. We're giving business the intelligence they need to optimize sales conversations and better understand their potential customers. With our technology, businesses can create the experiences that the customers want and seize on opportunities they've missed in the past. We are winning trials with new customers and existing customers who are asking for more of the capabilities Marchex can now provide. Results from these new products may take some time to flow through to our financials, however, we believe from the feedback we've received so far, that the value proposition is clear and substantial. And it solves mission-critical problems. Importantly, we're taking meaningful steps in opening up new and expanded market opportunities for Marchex that broaden our foundation for long-term growth. Now I'd like to hand the call to Russ.

Thanks Mike. Our business continues to evolve as we maintain our focus on solving critical problems for our customers. This is the result of the investment decisions we have made over the last two years, which are just beginning to bear fruit. Our product progress is helping us win more customers and grow the customers we have, which includes some of the largest brands in the United States. We're also expanding our sales channels and vertical footprint, which increases our overall market opportunity. Conversational insights powered by artificial intelligence are the backbone of our innovation. We all know there's lots of industry hype around AI right now. With our products, what we are seeing though is very real and measurable impact to the businesses we support. Our recent technology innovation represents advancements that will drive product development into the future and transform how businesses understand the customer journey and act to optimize and grow sales. We've evolved from a call analytics provider to a conversational analytics and sales accelerations solutions company powered by our proprietary speech technology and AI. Taking these new products into the sales and marketing organizations of some of the largest brands in the U.S. is both exciting and transformative for Marchex. We'll continue to look at ways to go faster, while maintaining the discipline we have in order to capitalize on the opportunity. And with that, I'll hand the call back to Mike.

Thank you, Russ. For the second quarter, revenues were $26.3 million. During the quarter, we continued to see growth from our analytics and our marketplace products on a year-over-year basis. Looking more closely at core analytics, revenue was $13.4 million representing meaningful year-over-year growth. Revenues from our core analytics products now comprise 50% of our total. This had an aggregate benefit on service costs as a percentage of revenue given the higher gross margin characteristics from this revenue stream. On an annual basis, we continue to see progress, particularly in verticals like auto where we secured more new customer relationships and advanced the rollout with customers which are in trials and early integrations. Furthermore, we recently launched our first trials with our Sales Rescue product, which represents an opportunity to further build our pipeline as we expand our product suite into new dynamic markets. While there is much to do, we are continuing to invest in our growing conversational analytics and solution suite, which is designed to meet the growing needs of our customers as they continue surfacing critical problems in their sales and customer engagement process through the data our platform provides now. Looking at the marketplace, second quarter revenue grow on a year-over-year basis largely from some budget increases and shifts from certain large customers as well as some new customers coming onboard as compared to the year ago period. During the quarter, we also saw progress in our Thrive or formerly DexYP relationship on a year-over-year basis, with growth driven by increases in marketplace initiatives as well as analytics. This was offset against the ongoing decline in the legacy YP products like Local Leads, which consistent with past commentary, we anticipate to transition at some point this year. We continue to make progress with Thrive and look forward to a close long-term relationship with them. Furthermore, as we innovate with Thrive, we believe Marchex can play a valuable role in adding other potential local aggregators as part of our sales channel strategy. And looking at the P&L for the second quarter, excluding stock-based compensation, amortization of intangible assets and acquisition-related costs, total operating costs for the second quarter were $25.7 million compared to $20.5 million in the second quarter in 2018. Service costs were $13.9 million, up from $11.3 million in the second quarter of 2018. Note, we continue to make progress in service cost percentages on a year-over-year basis due to a slightly higher mix coming from our analytics products. We expect our investments in infrastructure, AI and data science to serve as the foundation for new analytics products, which can benefit growth over time and positively impact service costs as a percentage of revenue. Sales and marketing costs were $3.9 million. This amount was down modestly compared to the second quarter of 2018 on a percentage basis. Product development costs were $4.9 million, relatively flat compared to the second quarter of 2018 on a percentage basis. Product development remains a key focus for our investments in new products and capabilities. During the quarter, we launched Marchex Stream, our new technology platform as well as new products like Sales Edge Rescue. These are just some of the examples of the investments we are making to support and build future products and AI capabilities. Moving to profitability measures. Adjusted operating income before amortization for the second quarter was $618,000. Adjusted EBITDA was $1.1 million. Net loss applicable to common stockholders was $1.1 million for the second quarter of 2019 or $0.02 per diluted share compared to a net loss of $700,000 or $0.02 per diluted share for the same period of 2018. Adjusted non-GAAP income per share was $0.01 per share compared to adjusted non-GAAP loss of $0.00 per share for the second quarter in 2018. Additionally, we ended the second quarter with approximately $51 million in cash on hand. Now turning to our outlook for the third quarter. We are forecasting revenue of $24 million or more for the third quarter. We anticipate the growth on a year-over-year basis will largely be driven by revenue from our analytics products as our pipeline of new analytics customers and rollouts to some existing customers from trial phases begins to have an impact on total revenue. For our marketplace product, we are forecasting some year-over-year growth, but we do currently anticipate that revenue will be down in the second half from the first half of the year, largely due to the expected seasonal budget plans of a limited number of large or medium marketplace customers. For core analytics revenue, we expect $13.4 million or more for the third quarter, representing continued significant growth on a year-over-year basis and on an estimated pro forma basis exclusive of acquisitions. We are continuing to see our analytics products and solutions resonate with customers and open up new opportunities. In key verticals like auto, we're continuing to make progress expanding some of our key relationships. And in addition, we see good opportunity to expand our pipeline in this and other verticals based on the number of sales conversations we're having and the new products we're launching. We are in the early phases of expanding our product suite to capitalize on our long-term investments in data science and artificial intelligence and on leveraging some of our new capabilities built on top of Marchex Stream. New products like our recently launched Sales Edge software suite are examples of our growing capabilities. We are encouraged by the early trials and believe there will be more to come as we move through the back half of the year. As these initiatives in key verticals like auto and our new products continue to roll out and manifest in new trials and relationships, we expect it will give us further visibility into 2020 and beyond regarding our momentum and growth. In addition, we are continuing to convert customers to long-term multi-year relationships highlighting our growing value proposition and the stickiness of our products. Next, looking at adjusted OIBA and EBITDA. For the third quarter, we are forecasting adjusted OIBA to be a loss of $500,000 or better. For adjusted EBITDA in the third quarter, we are forecasting $500,000 or more. We are taking advantage of the growing scale of our conversational data to innovate and deliver AI-driven solutions to help our customers capitalize on the opportunities that matter most in their business. Our technology can now identify critical points of failure during sales conversations and our solutions can help businesses optimize their sales process and take real-time actions to create better personalized experiences and outcomes. We're excited about the progress we're making in our business. And I would like to continue to thank all of our employees for their commitment and hard work. And we look forward to updating you on the next call. With that, operator, we will hand the call back to you.

[Operator Instructions] And your first question comes from the line of Darren Aftahi.

Hi, this is Dillon on for Darren. First on the analytics side. I know in the past you talked about your organic piece of that growing in double digits. So one, is that still the case? And if it's not, is there anything in the pipeline that gives you confidence that you can get back to the double-digit core organic growth rate?

So Dillon, its Mike. So the first question related to breaking it out. Because of the integrations of the acquisitions, it's not easy to break out the customer base before and after, but in the best effort that we can, in the second quarter it is still growing at a double-digit organic growth rate for that core analytics.

And how about the pipeline there that I believe is seeing some additional strength from some of your OEM or you're also starting to build out into some of the other verticals?

There is a number of things that we see that are actually progressively good related to some of the product initiatives, the customer feedback. It's early with some of the brand new products that we've just put out to the market, but we see an opportunity to expand some of the market and what we're addressing and we think there is a lot of good things that are happening that will relate to the analytics side of the product suite.

And then on the new product, Sales Rescue, is that mostly being rolled out to some of your OEM clients at the moment?

This is Russ, Dillon. As Mike said, it's very early, but some of these initial trials are focused on some of our core existing customers and based on that feedback, that will inform how we roll that out more broadly both to existing and new customers. And I just reiterate, specifically with Sales Edge Rescue, when Mike said that, well it's early, what we're learning so far gives us a lot of optimism both with the opportunity around this and how our market opportunity is expanding.

Just last one from me. Sort of how do you go from taking some of these products, especially the new ones that you're investing in various different lines within them, like with the Rescue and Local and Enterprise, and how do you scale those? Is it more of, I mean, I guess, so OEM example I understand, you can't get every dealership, so is it more about just educating the dealers? Just sort of curious how you're looking at scaling these?

Look, with each of these, we feel we have a pretty good understanding with our customers and prospective customers of where their biggest pain points and opportunities are and where these products and solutions specifically line up in delivering against that value proposition. And so for us, as we deliver these products early on, it's kind of proving out their impact in a way that what I would say isn't just about the products, it's about the whole program. So that as that gets proven out, there is a clear path to scale, kind of to integrate, operationalize and scale. And that is an extended process, but it's one that, as I mentioned, we're pretty optimistic about when you look at the kind of universe of relevant customers we have with some of these new products, that we already work with as well as the new opportunities we think it can open up by virtue of the unique capabilities that some of these products embody. So it's a process, but we think it gives us a lot of headroom over the kind of extend - over extended periods and increasingly kind of tangible impacts that drive our optimism.

And your next question comes from Mike Latimore.

Yes, this is Vijay here for Mike Latimore. My first question would be on the acquisition. Did you tell there was a contribution during the quarter from these acquisitions?

The break out from the acquisitions isn't spelled out explicitly. Again, it's consistent with some of the projections we put out initially back in November of 2018. So there is no substantive change in terms of the contribution on the bottom line to the operating income levels.

But can you comment on the status of integration of these acquisitions?

Every day, every month gets a little bit more. We still have ways to go. We think that, especially from the cost savings perspective, we've been able to make some progress on those things with our cost of sale, cost of service. We think there is still more opportunity as we go into the back half of this year and a little bit into 2019, but there is good progress on that side. And clearly, there is a significant amount of integration going on with the teams and the effort as well as some of the customers.

And on the auto side, so tell us what number of customers are in commercial deployment now, or how many in trials?

We haven't broken out auto, specifically in terms of the number of customers or how we deal with this specific contribution, but it is a key vertical for us. It is a vertical that matters a lot and I would say in the realm of the equation, it's clearly more than 1/10 of our total equation. And we still see there is significant opportunity, especially with our existing customers just to get more traction with more and more of the dealers and engagement with them.

And this is Russ, just to add on that, it's a growing roster and the existing ones we've got, we're seeing increasing kind of levels of integration. And one of the important elements as we learn from them and kind of take those learnings and inform our kind of priorities in investments is that in that vertical and auto specifically, and obviously, we're in the process of replicating that in other areas like home services and health care, but our Mindshare in relevance really seems to be increasing. And that again is reflective of kind of where we see our opportunity going both as we kind of work through the back half of the year and beyond.

And kind of just remind me how do you charge your auto customers? I mean something like revenue per dealer metric, something like that?

Primarily it's a program where they will buy a package. That package will be subscribed to for a period of time, could be three months, six months, a year, in some cases even longer, and that package often will have a volume of some of the conversations. How many conversations are part of the equation for the pricing to buy a given package. And so there is a type of subscription methodology to the dealership side.

And my last question would be on, is the analytics business cash flow breakeven yet?

So we don't break that out explicitly, but if you burden the entire operating cost structure, including the administrative side of the equation, it would still not be quite breakeven.

I mean any particular target date for the breakeven?

We haven't put out any forecast for a specific target date. I think obviously with just the leverage that comes from the growth in revenue that opportunity hopefully is relatively intermediate and potentially even earlier term.

We feel good about where we are with that.

Thank you. [Operator Instructions] And we currently have no further questions at this time.

Thank you, everyone, very much, and we look forward to updating you as we make further progress with the next quarterly conference call. End of Q&A:

Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.